Edgerron Company is able to produce two products, G and B, with the same machine

Question

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available.

The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $8,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

Product G Product B Selling price per unit $ 132 $ 160 Variable costs per unit 50 96 Contribution margin per unit $ 82 $ 64 Machine hours to produce 1 unit 0.4 hours 1.0 hours Maximum unit sales per month 600 units 150 units 1. Determine the contribution margin per machine hour that each product generates. Product G Product B Contribution margin per unit Contribution margin per machine hour Product G Product B Total Maximum number of units to be sold 600 150 Hours required to produce maximum units 2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month? Product G Product B Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin one shift 3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total contribution margin would this mix produce each month? Product G Product B Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin - two shifts 4. Suppose that the company determines that it can increase Product G's maximum sales to 700 units per month by spending $7,000 per month in marketing efforts. Should the company pursue this strategy and the double shift? Product G Product EB Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin two shifts and marketing campaign

Explanation / Answer

1 Product G Product B Contribution margin per unit 132 160 Machine hours per unit 0.4 1 Contribution margin per machine hour 330 160 Product G Product B Total Maximum number of units to be sold 600 150 Hours required to produce maximum units 240 150 390 2 Product G Product B Total Hours dedicated to the production of each product 176 176 Units produced for most profitable sales mix 440 Contribution margin per unit 132 Total contribution margin - one shift 58080 58080 3 Product G Product B Total Hours dedicated to the production of each product 240 112 352 Units produced for most profitable sales mix 600 112 Contribution margin per unit 132 160 Total contribution margin - two shifts 79200 17920 97120 Total contribution margin - one shift 58080 Change in contribution margin 39,040 Change in fixed costs 8,000 Change in operating income 31,040 Should the company add another shift? Yes 4 Product G Product B Total Hours dedicated to the production of each product 280 72 352 Units produced for most profitable sales mix 700 72 Contribution margin per unit 132 160 Total contribution margin - two shifts and marketing campaign 92400 11520 103920 Contribution margin - two shifts without marketing campaign 97120 Change in contribution margin 6,800 Additional marketing costs 7,000 Change in fixed costs 8,000 Change in operating income -8,200 Should the company pursue the marketing campaign? No

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